COVID-19 Uncertainties: The Stock-for-Stock Alternative
The market volatility and business uncertainties resulting from the pandemic have made it harder for potential buyers and sellers to see eye-to-eye on valuation and have increased closing risk. I’ve blogged about using earnouts and other techniques to bridge valuation gaps and address certainty issues, but this Gibson Dunn memo focuses on another alternative — stock-for-stock mergers. Here’s an excerpt:
Buyers and sellers struggling with these challenges may find that stock-for-stock mergers offer an attractive option. Transactions based on stock consideration can enable the parties to sidestep some of the difficulties involved in agreeing on a cash price for a target, by instead focusing on the target’s and the buyer’s relative valuations. In addition, using stock as consideration allows buyers to conserve cash and increase closing certainty by eliminating the need to obtain financing to complete a transaction.
The memo points out that stock-for-stock deals have some issues of their own when it comes to addressing valuation and certainty issues. These include determining whether the deal should involve a premium and whether to use a fixed or floating exchange ratio. In addition, while collars and walkaway rights haven’t been common features of recent stock-for-stock deals, the uncertainties associated with the current climate may see these protections become more popular.
A stock-for-stock deal may raise post-closing governance issues, particularly if the target’s shareholders are acquiring a substantial ownership stake in the business. In addition, this excerpt addresses some of the fiduciary duty concerns that will need to be addressed:
Even if Revlon duties do not apply, the target board is likely to feel significant pressure to make the best deal possible under the circumstances. The board’s decision to combine is highly likely to be second guessed under any circumstances, and even more so if the transaction is undertaken during a period of perceived overall economic risk. The board must assess whether it makes sense to combine at this time despite the current difficulty in projecting the companies’ respective future recovery, growth and prospects. Target stockholders may criticize the board for selling too low if the buyer is seen as taking advantage of the target’s falling stock price.
On top of all of this, there may also be the need for the buyer to obtain approval of its own shareholders for the deal, which can increase the time, complexity and uncertainty associated with the transaction.
The bottom line seems to be that while a stock-for-stock merger may have a lot to recommend it for the right parties during the current period of uncertainty, there are no easy answers for anyone looking to put a deal together right now.
-John Jenkins, DealLawyers.com October 13, 2020
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